Market Insider

What’s the Impact of Brexit on Wheat Markets?

With Brexit looking like it’s finalized, there is some concern over what’s going to happen with the United Kingdom’s agriculture industry, namely trade flows.

Since there is no open border now between the UK and EU, there are unknowns as it related to trade. Will there be tariffs? Will there be a new free trade deal negotiated?

As it stands today, most experts in the UK agree that the milling wheat sector will face more challenges than malt barley if there’s no trade deal negotiated (for the record, most of the UK’s wheat production actually gets used up domestically or shipped out as feed). Ultimately though, there are 3 scenarios that may play out:

1. Free trade deal with zero tariffs but non-trade barriers (i.e. Rules of Origin)2. Unilateral trade deal where UK imports are tariff-free, but exports are subject to taxes; and3. Mutually-recognized tariffs on both UK imports and exports, as per WTO rules.

Specifically for scenario number one, things get tricky when looking at Ireland. Explicitly, the Republic of Ireland is part of the EU still but Northern Ireland is part of the UK. Given the amount of trade between the two countries, as well as how much product Ireland actually exports to all of the UK (not just Northern Ireland), things can get a bit hazy.

As it stands, UK flour production depends largely on imported wheat, especially product from North America, namely Canada. With the trade relationship between the EU and the UK on the rocks, it’s very possible that we’ll see more North American wheat exported to the UK. However, if UK flour is made with North American wheat, it may be tough for said UK flour to make it into the EU market without a tariff applied. Currently, there are tariffs for grain exported by the UK to the EU, but not flour, malt, or other milling products.

Under scenario number two, there would be no incremental cost for UK millers as imported wheat from the EU comes in tax-free. However, feed wheat costs would increase a bit as exported product would be taxed.

Under scenario number three, it’s likely that EU wheat imported by the UK would come with a tariff of €12 per metric tonne (or $15.40 USD per MT and 34¢ USD and 44¢ CAD per bushel). Thus, non-EU wheat like that produced domestically or that imported from a country other than the EU might start to see a premium. However, give the tight margins in the industry, the UK’s Agriculture and Horticulture Development Board says that this would likely force one or two millers to close, as “there would be major overcapacity problems across the industry.”

Finally, with Brexit, UK farmers no longer will receive EU subsidies under the Common Agricultural Policy. Without these subsidies, it’s very likely that we could see UK wheat and malt barley production fall as farmers diversify into other crops where returns are better/they can make money on their own.

All this in mind, it’s likely that non-EU wheat imports will increase. And there’s some good quality product available in the U.S. and Canada this year, but it seems like the Canada is the country finding the international markets (or maybe is just cheaper?) Through Week 15 of the 2018/19 crop year (ending November 11), Canadian non-durum wheat exports are sitting at a total of 5.44 MMT, which, is up 23% year-over-year.

From the U.S., hard red spring wheat exports are tracking 7% behind last year’s pace with 2.65 MMT shipped out through their Week 23 of the 2018/19 crop year.

Overall, there’s definitely going to some healthy demand in the world in 2018/19 for good quality, given Australia’s production woes and the geopolitical issues in Europe. Now it’s a matter of executing.